What’s New

• 2017 will be transition year for earnings due to timing of manufacturing orders

• This is exacerbated by high degree of operating leverage. We cut FY17-18F earnings by 13%/4%

• LRT 3 win crucial to beat order win forecast

• BUY with lower TP of RM2.7

Still a cheap infrastructure proxy. Within our construction universe, Kimlun Corp (Kimlun) stands out as the most direct small-cap proxy to the sector which also boasts an under- appreciated manufacturing division. 2017 will be a transition year for earnings given the timing of manufacturing orders. Valuation remains cheap at single-digit PE on the back of promising new order replenishment.

Shaking off the Iskandar legacy. Its construction orderbook stands at RM1.67bn where the largest project is the Pan Borneo Highway (PBH) Sarawak project. Its total orderbook including manufacturing is RM1.9bn. It has successfully reinvented itself to be a less Johor-centric contractor in the high-rise space and raised its exposure to more infrastructure works. The percentage of public/private sector exposure in 2016 was 53%/47% (vs 4%/96% in 2014) and building/infrastructure related jobs is now 53%/47% (vs 91%/9% in 2014). Some of the strategies for its construction division are to target non-residential projects, bid for more infrastructure-related projects and look for opportunities outside of Iskandar Malaysia.

Under-appreciated manufacturing division. The key differentiating factor for Kimlun vs other contractors is its precast division which boasts gross profit margins of >20%, thanks to less intense competition. The award of the RM199m Segmental Box Girder (SBG) project and RM53m for Tunnel Lining Segment (TLS) for MRT Line 2 has further bolstered the earnings prospects of this division. In addition, this division will benefit from more MRT projects in Singapore, as well as higher adoption of IBS-related works for the affordable housing market.

Valuation:

Our TP is now set at RM2.73, based on 11x FY17F PE. At 11x, this is at +1SD valuation of its historical mean, which we think is fair given its still strong orderbook, higher earnings base and strong balance sheet.

Key Risks to Our View:

Low-margin wins. The biggest risk is its perceived over-reliance on projects in Johor. We think this is mitigated by its stringent bidding process where it only accepts projects from strong clients while also ascertaining the saleability of projects.

Source: Alliance Research - 10 Mar 2017